A couple of months ago I wrote about my career-defining trade as a 30-year-old bond fund manager. I went against the grain and bought long-dated gilts a few months before the Labour government was elected in 1997.
Everyone was pessimistic about “tax and spend” policies, which made me confident those worries were already in the price. When the new Blair/Brown government announced it was making the Bank of England independent, gilt prices rocketed, especially those long-dated instruments.
Would I make the same bet today? Gilts now look less interesting than the UK stock market, derided and unloved for many years. Its moribund performance and lack of popularity among issuers and investors alike is summed up by one striking data point: a decade ago, UK equities accounted for 10pc of the MSCI global index; that figure is just 4pc now.
Only 56 companies applied to list on the London Stock Exchange’s main market last year, compared with an average of exactly twice that number annually over the previous five years. And of those 56, just 30 were approved by the Financial Conduct Authority (FCA) and 23 actually listed.
Meanwhile, the number of companies quitting continues to grow. In 2016, 2,267 firms with a combined market capitalisation of £4.6 trillion were listed on the LSE, falling to 1,836 firms and £3.5 trillion by the end of last year.
Shell is the latest mega-company to warn it may move to America – a move that would instantly reduce that market cap figure by 8pc.
Analysts at investment bank Peel Hunt have warned that the UK smaller companies index will “cease to exist by 2028” if trends continue. At the end of 2023, just 114 companies (excluding investment trusts) were listed on the FTSE SmallCap Index compared to 160 just five years earlier.
While there’s no sign of a recovery in IPOs (initial public offerings), recent weeks have seen something of a bounce in UK equities.
After years of going nowhere (the price of the index was literally unchanged over the two decades to 2020, although investors benefited from dividends) the FTSE100 hit a record high in May.
It still fell short of rallies in the US, Europe and Japan, and election jitters and inflation worries have since caused a partial retreat, but the index remains above the symbolic 8,000 barrier.
At the start of the new tax year, I said I would gradually invest half my Isa allowance in UK equities.
Given all that’s happened, any investor should reassess – but I’m sticking with my view. There’s less opportunity now than in 1997 for a gung-ho trade but I see several potential positives for the UK market, whatever is going on in the rest of the world.
Not all are election-related, and not all (perhaps none) will come to pass, but you’ll see how I’m looking at current market views and considering how things may turn out differently. Remember, these are not predictions, or political views.
Interest rate cuts might occur ahead of expectations
Mixed recent inflation data (coupled with doubts over the Bank of England’s forecasting prowess – they waited too long to raise rates and may wait too long to cut them) has pushed out the market’s timetable for rate cuts and created the opportunity for a positive surprise.
A new government should go for growth – and pull a rabbit out of the hat
This (sadly) feels a negative election, with a widespread desire for something new, but little real enthusiasm for any party (although Nigel Farage’s decision to stand may now shake things up).
The polls may be volatile in the final weeks, but if Labour wins a decisive victory it is not expected to do anything extraordinary.
That leaves scope for surprises – what about the abolition of stamp duty on equity dealing, for example? (Admittedly, the opposite of what Labour planned in 2019, when they were looking to extend the stamp duty regime, but stranger things have happened in politics).
The Centre for Policy Studies describes the unpopular 0.5pc tax on share dealings as a tax on growth. It is also out of line with our international rivals.
Independent modelling by economics consultancy Oxera suggests a removal would lead to a one-off 4pc increase in UK equity valuations, a permanent increase in GDP of between 0.2pc and 0.7pc and would have little impact on Treasury coffers, with extra tax from higher growth offsetting the loss of immediate tax receipts.
Such a move would quickly establish Labour as a genuine party of business and growth.
An incoming Labour government might actually champion financial services
Shadow chancellor Rachel Reeves has said Labour will “unashamedly champion the financial services sector as one of the UK’s greatest assets”. But the sector is over-regulated, and changes to those regulations are painfully slow (or adding to the burden).
The Conservatives introduced a new growth and competitiveness “secondary objective” for regulators, but there is scant evidence of a rebalancing of risk and reward.
Innovation is essential. A change in approach (and pace) wouldn’t deliver gains overnight but is critical for a revival in Britain’s fortunes as a global financial centre.
Whatever Ms Reeves’s declarations, expectations aren’t high that paring back red tape is a priority – another opportunity for surprise.
Labour must go for growth if it wins – and may be given the benefit of the doubt
“Steady as she goes” was necessary after the Truss/Kwarteng budget, but was never enough to drive economic recovery and a much-needed sense of national optimism.
I am a Conservative peer and far from convinced that Labour has the right ideas, but they will have the advantage of a fresh start to try. Since businesses will want a new government to succeed, there may be a honeymoon period.
A new generation may start to feel excited about their future
This is critical. The past few years have been brutal for young people, with lockdowns and the high cost of living forcing many to live at home for longer. These travails are not all down to the present government but, again, a line in the sand can help us move forward.
Although I disagree fundamentally with Labour’s stance on private schools (even though I went to state schools), their focus on young people is right. More than anything, this country needs a more hopeful next generation to drive growth and prosperity.
In time, that would be very good news for our stock market.
Britain offers expertise in key future growth areas
We may be “broken Britain” when it comes to public services, but offer a wide range of skills to be proud of.
We have missed out on tech giants, but the next drivers of growth might well include areas of British excellence – life sciences, education, creative industries, for example. All very relevant in an AI-powered world, too. There will be plenty to get excited about – and to invest in.
Almost no one likes UK equities
It’s hard to overstate how dismal things are. Not just sentiment but actual flows. In 1992, ONS data revealed UK pension funds invested a record 32pc of their assets in domestic stocks; the latest figure (2022), was 1.6pc.
I suspect it’s even lower now; the data to the end of March shows 34 consecutive months of outflows from UK equity funds.
Extreme negativity doesn’t guarantee sunny uplands ahead but is one sign that a market is oversold. With renewed self-belief, we could see a wave of investment in Britain.
Political uncertainty will be behind us – and in front of the US
After our election, investors will turn their attention stateside for a bigger drama.
The UK equity market looks especially undervalued relative to US shares – driven mainly by the dearth of big tech stocks here.
The US market has performed diametrically opposite to the UK and now accounts for almost 70pc of the world index.
If global fund managers decide to diversify even a small portion of funds, a US to UK switch would be justified – especially given the preponderance of dividend stocks, a “value” play that’s the polar opposite of the US’s “magnificent seven” growth stocks.
Some big British companies currently offer dividend yields of around 10pc – Vodafone and Phoenix, closely followed by British American Tobacco and M&G.
As I say, none of this may come to pass – but there are at least a few reasons not to write the UK equity market off just yet.
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